A Simple Structural Estimator of Disclosure Costs

Abstract

This study recovers a simple firm-level measure of disclosure costs implied by the voluntary disclosure theory of Verrecchia (1990). The measure does not require a-priori knowledge by the researcher of the distribution of private information and can be implemented with three simple observable inputs: the minimum, average and frequency of disclosure. We document a positive association of disclosure costs with proxies for existing and potential competition, information asymmetry and insider trading. Higher values of disclosure costs are associated with lower contemporaneous and future disclosures, as well as lower propensity to disclose in holdout samples. Overall, we provide future researchers with an easy-to-implement procedure to structurally estimate unobserved firm-level disclosure costs.

Keywords: Voluntary Disclosures; Structural Estimation; Costly Disclosures